DBRS: Regions’ 3Q14 IBPT Up QoQ on Higher Fee Income

Summary:
• 3Q14 earnings to common shareholders of $305 million, up 4.4% from $292 million for 2Q14, mostly due to lower provisions for loan loss reserves, and higher deposit service charges.
• On an adjusted basis, excluding non-core items, Regions’ income before provisions and taxes (IBPT) increased 2.5% linked-quarter boosted by the higher fees and earning assets.
• DBRS, Inc. rates Regions Financial Corporation Issuer & Senior debt at BBB with a Stable trend.

DBRS, Inc. (DBRS) considers Regions Financial Corporation’s (Regions or the Company) 3Q14 results as sound, despite considerable headwinds, including sustained net interest margin (NIM) pressure and a relatively high expense base. On an adjusted basis, the Company’s IBPT improved 2.5% QoQ, reflecting higher adjusted fee income. Despite continued earnings pressure, DBRS considers Regions’ balance sheet fundamentals to be solid, including sequential loan growth (period-end), relatively sound asset quality and solid funding and capital profiles.

Overall, improved IBPT was driven by higher adjusted non-interest income (excludes leveraged lease termination and securities gains), mostly reflecting increased levels of deposit service charges. Going forward, the fee income line will be moderately pressured by the phase-out of the Company’s deposit advance product by YE14. Meanwhile, spread income was stable QoQ, as higher average earning assets offset a 6 bps decrease in the Company’s NIM. Higher average assets reflected increased levels of securities, commercial and industrial exposures, and auto loans. Positively, Regions remains well positioned for a rising rate environment, given its asset sensitive balance sheet.

The Company’s expense base remains elevated. Regions’ efficiency ratio was a relatively high 63.6% for 3Q14 (64.2% for 2Q14), signaling room for further improvement and competitiveness. Positively, Regions continues to focus on driving cost efficiencies through branch consolidations and other initiatives. Overall, management anticipates that full year 2014 adjusted expenses will be less than adjusted 2013 expenses.

Regions’ asset quality continues to stabilize, reflecting lower levels of non-performing assets, and very low net charge-offs. Meanwhile, capital remains strong, as reflected by the Company’s estimated Basel III Tier I Common Equity ratio of 11.2%. DBRS notes that Regions currently has in place a $350 million share repurchase program, and will begin purchasing shares in 4Q14.

DBRS rates Regions Financial Corporation’s Issuer & Senior debt at BBB with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.